Medicare Program; Update to the Prospective Payment System for Home Health Agencies for FY 2003

AGENCY:

Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION:

Notice with comment period.

SUMMARY:

This notice with comment period sets forth an update to the 60-day national episode rates and the national per-visit amounts under the Medicare prospective payment system for home health agencies.

DATES:

Effective Date: The rate updates in this notice with comment period are effective on October 1, 2002.

Comment Period: We will consider comments if we receive them at the appropriate address, as provided below, no later than 5 p.m. on August 27, 2002.

ADDRESSES:

In commenting, please refer to file code CMS-1198-NC. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission. Mail written comments (one original and three copies) to the following address only: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1198-NC, P.O. Box 8016,Baltimore, MD 21244-8016.

Please allow sufficient time for mailed comments to be timely received in the event of delivery delays.

If you prefer, you may deliver (by hand or courier) your written comments (one original and three copies) to one of the following addresses:

Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201, or Room C5-14-03, 7500 Security Boulevard,Baltimore, MD 21244-1850.

Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and could be considered late.

For information on viewing public comments, see the beginning of the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:

Susan Levy, (410) 786-9364; Chester Robinson, (410) 786-6959

SUPPLEMENTARY INFORMATION:

Inspection of Public Comments: Comments received timely will be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone (410) 786-7197.

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I. Background

Payment to Home Health Agencies

A. Balanced Budget Act of 1997

The Balanced Budget Act of 1997 (BBA), Public Law 105-33, enacted on August 5, 1997, significantly changed the way Medicare pays for Medicare home health services. Until the implementation of a home health prospective payment system (HH PPS) on October 1, 2000, home health agencies (HHAs) received payment under a cost-based reimbursement system. Section 4603 of the BBA governed the development of the HH PPS by adding section 1895 to the Social Security Act (the Act).

B. System for Payment of Home Health Services

Generally, Medicare makes payment under the home health prospective payment system on the basis of a national standardized 60-day episode payment, adjusted for case-mix and wage index. For episodes with four or fewer visits, Medicare pays on the basis of a national per-visit amount by discipline, referred to as a low utilization payment adjustment (LUPA). Medicare also adjusts the 60-day episode payment for certain intervening events that give rise to a partial episode payment (PEP) adjustment or a significant change in condition (SCIC) adjustment. For certain cases that exceed a specific cost threshold, an outlier adjustment may also be available. For a complete and full description of the home health prospective payment system as required by the BBA and as refined by the Omnibus Consolidated and Emergency Supplemental Appropriations Act (OCESAA) for FY 1999, Pub. L. 105-277, enacted on October 21, 1998, and the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999 (BBRA), Public Law 106-113, enacted on November 29, 1999, see the July 3, 2000 HH PPS final rule (65 FR 41128).

C. Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000

Section 1895(b)(3)(A)(i)(III) of the Act, as redesignated by section 501 of the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA), Public Law 106-554, enacted on December 21, 2000, delays until FY 2003 the application of the 15 percent reduction on the interim payment limits for home health services as applied to the home health prospective payment rates required by earlier legislation. Section 501 of BIPA also amends section 302(c) of the BBRA, to now require a report to the Congress by the Comptroller General of the United States no later than April 1, 2002 on the 15 percent reduction issue.

Section 502 of the BIPA sets forth a special rule for payment for FY 2001 based on adjustment of the published prospective payment amounts. This special payment rule has the effect of restoring the market basket reduction already incorporated into the home health prospective payment system (HH PPS) rates. The adjustment provides the effect of a full market basket adjustment to the HH PPS rates for FY 2001. The statute also requires paying episodes and national per-visit amounts for low utilization payment adjustments (LUPAs) ending on or after April 1, 2001 and before October 1, 2001 an additional 2.2 percent.

Section 508 of the BIPA also requires, for home health services furnished in a rural area (as defined in section 1886(d)(2)(D) of the Act) on or after April 1, 2001 and before April 1, 2003, that the Secretary increase the payment amount otherwise made under section 1895 of the Act for the services by 10 percent. The statute waives budget neutrality for purposes of this increase since it specifically states that the Secretary not reduce the standard prospective payment amount (or amounts) under section 1895 of the Act applicable to home health services furnished during a period to offset the increase in payments resulting in the application of this section of the statute.

II. Analysis of and Responses to Comments on the Home Health Prospective Payment System June 29, 2001 Notice With Comment Period

On June 29, 2001, we published a notice with comment period in the Federal Register (66 FR 34687) that set forth an update to the 60-day national episode rates and the national per-visit amounts under the Medicare prospective payment system for home health agencies (HHAs) for FY 2002. In this section, we respond to the two public comments that we received on the FY 2002 HH PPS:

Comment: Commenters recommended that we use the hospital wage index with consideration of statutorily established floors and administratively determined classifications. Further the commenter asked that the wage index used in determining the home health payment rate should be the same hospital wage index used and published for hospitals during the same fiscal year.

Response: As we have explained in the June 29, 2001 notice with comment period, we believe the use of the most recent available pre-floor and pre-reclassified hospital wage index data results in the appropriate adjustment to the labor portion of the costs as required by statute. By statute, the hospital wage index is adjusted to account for geographic reclassification of hospitals. The geographic reclassification applies only to hospitals. In addition, the hospital wage index has specific floors that are required by statute and apply only to hospitals. Because these reclassifications and floors do not apply to HHAs, we use the most recent available pre-floor and pre-classified hospital wage index data to adjust the home health payment rates. We recognize that the pre-floor and pre-classified hospital wage index differs slightly from the numbers published in the Medicare inpatient hospital prospective payment system (PPS) regulations but note that the wage indices published in the July 3, 2000 HH PPS final rule and subsequent annual updates reflect the most recent available pre-floor and pre-classified hospital wage index available at the time of publication.

Comment: Commenters suggested that we recalculate the base HH PPS rates to incorporate a different assumption than the published assumption of the 5 percent low utilization payment adjustment episodes in the base year of HH PPS. The commenters believe the recalculation should be characterized as an error on the face of the original calculation rather than viewed as a rebasing.

Response: In establishing the payment unit for HH PPS, including the 5 percent low utilization payment adjustment episode, we used the best available data in determining the payment rates for the base year for HH PPS. The statute provides for an annual update of the HH PPS payment rates. The statute does not contemplate a recalculation of the initial base year after the rates are established. We further note that the statute provides for a limitation on review of the HH PPS, in particular the establishment of the payment unit and the computations of the initial standardized prospective payment amounts.

III. Provisions of this Notice with Comment Period

A. National Standardized 60-Day Episode Rate

Medicare HH PPS has been effective since October 1, 2000. As set forth in the final rule published July 3, 2000 in the Federal Register (65 FR 41128), the unit of payment under Medicare HH PPS is a national standardized 60-day episode rate. As set forth in the July 3, 2000 final rule at 42 CFR 484.220, we adjust the national standardized 60-day episode rate by case-mix and wage index based on the site of service for the beneficiary. The FY 2003 HH PPS rates use the same case-mix methodology and application of the wage index adjustment to the labor portion of the HH PPS rates as set forth in the July 3, 2000 final rule. We multiply the national 60-day episode rate by the patient's applicable case-mix weight. We divide the case-mix adjusted amount into a labor and nonlabor portion. We multiply the labor portion by the applicable wage index based on the site of service of the beneficiary. The labor portion of the rate continues to be .77668 and the nonlabor portion of the rate continues to be .22332. We add the wage adjusted portion to the nonlabor portion yielding the case-mix and wage adjusted 60-day episode rate subject to applicable adjustments.

For FY 2003, we use again the design and case-mix methodology described in section III.G of the July 3, 2000 HH PPS final rule (65 FR 41192 through 41203). For FY 2003, we base the wage index adjustment to the labor portion of the PPS rates on the most recent pre-floor and pre-reclassified hospital wage index available at the time of publication of this notice, which is discussed in section III.D of this notice with comment period.

As discussed in the July 3, 2000 HH PPS final rule, for episodes with four or fewer visits, Medicare pays the national per-visit amount by discipline, referred to as a LUPA. We update the national per-visit amounts by discipline annually by the applicable home health market basket. We adjust the national per-visit amount by the appropriate wage index based on the site of service for the beneficiary as set forth in § 484.230. We adjust the labor portion of the updated national per-visit amounts by discipline used to calculate the LUPA by the most recent pre-floor and pre-reclassified hospital wage index available at the time of publication of this notice, as discussed in section III.D of this notice with comment period.

As outlined in the July 3, 2000 HH PPS final rule, Medicare pays the 60-day case-mix and wage adjusted episode payment on a split percentage payment approach. The split percentage payment approach includes an initial percentage payment and a final percentage payment as set forth in § 484.205(b)(1) and (b)(2). We may base the initial percentage payment on the submission of a request for anticipated payment and the final percentage payment on the submission of the claim for the episode, as discussed in regulations in § 409.43. The claim for the episode that the HHA submits for the final percentage payment determines the total payment amount for the episode and whether we make an applicable adjustment to the 60-day case-mix and wage adjusted episode payment. The end date of the 60-day episode as reported on the claim determines the rate level at which Medicare will pay the claim for the fiscal period.

As discussed in the July 3, 2000 HH PPS final rule, we may adjust the 60-day case-mix and wage adjusted episode payment based on the information submitted on the claim to reflect the following:

• A low utilization payment provided on a per-visit basis as set forth in § 484.205(c) and § 484.230.
• A partial episode payment adjustment as set forth in § 484.205(d) and § 484.235.
• A significant change in condition adjustment as set forth in § 484.205(e) and § 484.237.
• An outlier payment as set forth in § 484.205(f) and § 484.240.

This notice with comment period reflects the updated national 60-day episode rate, the national per-visit amounts used to calculate the LUPA, and imputed costs for the outlier payment for FY 2003 that are effective October 1, 2002.

B. FY 2003 Update to the Home Health Market Basket Index

Section 1895(b)(3)(B)(ii) of the Act requires the standard prospective payment amounts to be increased by a factor equal to the home health market basket minus 1.1 percentage points for FY 2003. This has been codified in regulations in § 484.225.

• FY 2003 Adjustments

In calculating the annual update for the FY 2003 60-day episode rates, we first looked at the FY 2002 rates as a starting point. The FY 2002 national 60-day episode rate is $2,274.17. Second, we took into account section 501 of BIPA.

As stated in the background section of this update notice, section 501 of BIPA revised the statute to require the application of the 15 percent reduction on payment limits under the interim payment system (IPS), which is no longer in effect for home health services, for FY 2003. This statutory provision required an estimation of what Medicare spending would have been in FY 2001 if the IPS were still in effect and its limits reduced by 15 percent updated to FY 2003 in determining the HH PPS rates. It is important to note that HH PPS, not the interim payment system, has been in effect since October 1, 2000. Originally, the Balanced Budget Act of 1997 (BBA), Public Law 105-33, enacted on August 5, 1997, statutory language required the base year PPS rates to be budget neutral to what we would have paid under the IPS if the per-beneficiary and per-visit limits had been reduced by 15 percent. At the time of the BBA, when HHAs were paid the lower of their actual costs or the cost limits, most HHAs were paid at their limits. Absent any behavioral offset, lowering the IPS limits by 15 percent would have resulted in a straight reduction of 15 percent of Medicare spending for home health services.

At the time the BBA was enacted, we believed that the industry would eventually alter their behavior to avoid reaching the cost limits, and therefore upon implementation of the 15 percent reduction, not all HHAs would reach the level of the limits as reduced. We believed that the industry would respond to the reduced limits by increasing the number of low-cost beneficiaries served, thereby increasing the costs and decreasing the effect of the limits.

As a result of this anticipated behavior, we determined that the level by which actual payments would be reduced by lowering the limits would not be the same as the percent by which the limits themselves would be lowered. That is, the application of the 15 percent reduction in cost limits would lead to a 7 percent reduction in aggregate home health spending, hence, equivalently a 7 percent reduction in HH PPS payments. The statute requires us to look at the 15 percent reduction to the IPS limits updated to FY 2003. In determining how to calculate and implement the HH PPS rates using the required 15 percent reduction in cost limits, we still believe the HHAs would have altered their behavior to avoid reaching the limits. Thus, we retain our assumptions that result in the 7 percent reduction in overall payments. Based on the latest available reliable date, our best estimate is that a 15 percent reduction in cost limits would result in a 7 percent reduction in aggregate home health spending and, therefore, equivalently a 7 percent reduction on home health spending.

Accordingly, we calculate the FY 2003 HH PPS rates by first reducing the FY 2002 HH PPS rates by 7 percent. That amount is updated by the applicable home health market basket increase minus 1.1 percentage points, as required by the statute. It is important to note that Medicare home health payments are projected to continue to grow, even with the effect of the 15 percent reduction to the IPS limits. Under President Bush's FY 2003 budget, which assumes no further delays in the reduction, Medicare's total home health spending is projected to increase 12.2 percent in FY 2003, 8.3 percent in FY 2004, and 7.4 percent in FY 2005.

In order to calculate the FY 2003 national 60-day episode rate, the FY 2002 national 60-day episode rate ($2,274.17) is multiplied by .93 to take into account section 501 of BIPA. The annual update for FY 2003 is the home health market basket minus 1.1 percentage points as defined in section 1895(b)(3)(B)(ii) of the Act. The home health market basket increase for FY 2003 is 3.2 percent. The previous amount is increased by the FY 2003 home health market basket increase minus 1.1 percentage points (2.1 percent) to yield the updated FY 2003 national 60-day episode rate ($2,159.39).

• National Per-visit Amounts Used to Pay LUPAs and Compute Imputed Costs used in Outlier Calculations.

As discussed previously in this notice with comment period, the policies governing the LUPAs and outlier calculations set forth in the July 3, 2000 HH PPS final rule will continue during FY 2003. In calculating the annual update for the FY 2003 national per-visit amounts we use to pay LUPAs and to compute the imputed costs in outlier calculations, we again looked at the FY 2002 rates as a starting point. We used the same approach to implement section 501 of BIPA. The statute requires us to look at the 15 percent reduction to the IPS limits in FY 2003, 2 years after HH PPS has been implemented and the IPS has ended. As stated previously, we believe the HHAs would have altered their behavior to avoid reaching the IPS limits. We have determined that behavioral response would translate the required 15 percent reduction in cost limits into a 7 percent reduction in overall payments in FY 2003. In response to section 501 of BIPA, we reduced the national per-visit amounts by home health discipline by 7 percent. Those amounts are then increased by the FY 2003 home health market basket increase minus 1.1 percentage points to yield the updated per-visit amounts for each home health discipline for FY 2003. (See table below.)

C. Rural Add-On as Required by the BIPA

Section 508 of the BIPA requires, for home health services furnished in a rural area (as defined in section 1886(d)(2)(D) of the Act) on or after April 1, 2001 and before April 1, 2003, that the Secretary increase by 10 percent the payment amount otherwise made under section 1895 of the Act for services. The statute waives budget neutrality related to this provision as it specifically states that the Secretary shall not reduce the standard prospective payment amount (or amounts) under section 1895 of the Act applicable to home health services furnished during a period to offset the increase in payments resulting in the application of this section of the statute.

Section 508 provides for payment for the national standardized episode amounts and LUPA national per-visit amounts for the first half of FY 2003 by an additional 10 percent for home health services furnished in rural areas where the site of service for the beneficiary is a non-MSA area. By statute, the 10 percent rural add-on applies to home health services furnished in a rural area (as defined in section 1886(d)(2)(D) of the Act) on or after April 1, 2001 and before April 1, 2003. Therefore, the 10 percent rural add-on ends mid-FY 2003 for episodes ending on or after April 1, 2003. The applicable case-mix and wage index adjustment is subsequently applied for the provision of home health services where the site of service is the non-Metropolitan Statistical Area (MSA) of the beneficiary. Similarly, the applicable wage index adjustment is subsequently applied to the LUPA per-visit amounts adjusted for the provision of home health services where the site of service for the beneficiary is a non-MSA area. We implemented this provision for FY 2001 on April 1, 2001 through the Program Memorandum, “Restoration of Full Home Health Market Basket Update for Home Health Services for Fiscal Year 2001 and Temporary 10 Percent Payment Increase for Home Health Services Furnished in a Rural Area for 24 Months Under the Home Health Prospective Payment System (HH PPS)” (Transmittal A-01-06 issued January 16, 2001) and for FY 2002 through the FY 2002 annual HH PPS update notice published on June 29, 2001 in the Federal Register (66 FR 34687). (See FY 2003 add-on noted in tables below.)

D. Wage Index

Sections 1895(b)(4)(A)(ii) and (b)(4)(C) of the Act require the Secretary to establish area wage adjustment factors that reflect the relative level of wages and wage-related costs applicable to the furnishing of home health services and to provide appropriate adjustments to the episode payment amounts under HH PPS to account for area wage differences. We apply the appropriate wage index value to the labor portion of the HH PPS rates based on the geographic area in which the beneficiary received home health services. We determine each HHA's labor market area based on definitions of MSAs issued by the Office of Management and Budget (OMB).

As discussed previously and set forth in the July 3, 2000 final rule, the statute provides that the wage adjustment factors may be the factors used by the Secretary for purposes of section 1886(d)(3)(E) of the Act for hospital wage adjustment factors. Again, as discussed in the July 3, 2000 final rule, we used the most recent pre-floor and pre-reclassified hospital wage index available at the time of publication of this notice to adjust the labor portion of the HH PPS rates based on the geographic area in which the beneficiary receives the home health services. We believe the use of the most recent available pre-floor and pre-reclassified hospital wage index data results in the appropriate adjustment to the labor portion of the costs as required by statute. (See addenda A and B of this notice with comment period, respectively, for the rural and urban hospital wage indexes.)

E. Clarification of Policy Governing Current Accelerated Payment Policy

Since the implementation of the HH PPS in 2000, we have received questions concerning the regulations governing accelerated payments under HH PPS. We wish to clarify the provisions for accelerated payments for HHAs set forth in § 484.245(a). This general rule was not meant to be restrictive, but to complement the regulations governing intermediary accelerated payments to providers in § 413.64(g). The regulations at § 413.64(g) governing the criteria for accelerated payments to providers have not changed under HH PPS. Accelerated payments are permitted under HH PPS for HHAs that meet the longstanding qualifying criteria. When a provider requests an accelerated payment, it may be made to the provider, as set forth in § 413.64(g). This provision includes an HHA that is receiving payment under the HH PPS under several conditions. For example, an HHA continues to be eligible to receive accelerated payment under § 413.64(g) if it is experiencing financial difficulties because there is a delay by the intermediary in making payments or in exceptional situations, in which the HHA has experienced a temporary delay in preparing and submitting bills to the intermediary beyond its normal billing cycle.

IV. Waiver of Proposed Rulemaking

We ordinarily publish a proposed notice in the Federal Register to provide a period for public comment before the provisions of a notice such as this take effect. We can waive this procedure, however, if we find good cause that a notice-and-comment procedure is impracticable, unnecessary, or contrary to the public interest and we incorporate a statement of finding and its reasons in the notice issued.

We believe it is unnecessary to undertake a proposed notice with comment period as the statute requires annual updates to the HH PPS rates, the methodologies used to update the rate have been previously subject to public comment, and this notice reflects the application of previously established methodologies. Further, the rural add-on and adjustments to FY 2001 HH PPS rates that were required by the BIPA before this annual update for the FY 2003 PPS rates are dictated by statute and do not require an exercise of discretion. In addition, the clarification to the accelerated payment policy reflects no substantive change in policy and practice. Therefore, for good cause, we waive prior notice and comment procedures. As indicated previously, we are, however, providing a 60-day comment period for public comment.

V. Collection of Information Requirements

This document does not impose information collection and recordkeeping requirements. Consequently, it need not be reviewed by the Office of Management and Budget under the authority of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

VI. Response to Comments

Because of the large number of items of correspondence we normally receive on Federal Register documents published for comment, we are not able to acknowledge or respond to them individually. We will consider all comments we receive by the date and time specified in the DATES section of this preamble, and, if we proceed with a subsequent document, we will respond to the major comments in the preamble to that document.

VII. Regulatory Impact Analysis

A. Overall Impact

We have examined the impacts of this notice as required by Executive Order 12866 (September 1993, Regulatory Planning and Review) and the Regulatory Flexibility Act (RFA) (September 19, 1980 Pub. L. 96-354). Executive Order 12866 directs agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year). The update set forth in this notice applies to Medicare payments under HH PPS in FY 2003. Accordingly, the analysis that follows describes the impact in FY 2003 only. We estimate that there will be an additional $320 million in FY 2003 expenditures attributable to the FY 2003 market basket increase of 2.1 percent. The statute requires the FY 2003 home health market basket increase of 3.2 percent to be reduced by 1.1 percentage points. Section 501 of BIPA requires the application of the 15 percent reduction on payment limits under the IPS, which is no longer in effect, for home health services updated to FY 2003. This statutory provision requires the estimation of what Medicare spending would have been if the IPS limits were reduced by 15 percent and updated to FY 2003. To achieve this level of home health spending, we will reduce the HH PPS rates by 7 percent. The impact on providers due to the implementation of the 7 percent reduction is to reduce Medicare home health spending by $821 million in FY 2003, $1,132 million in FY 2004, and $1,212 million in FY 2005. As stated above, the expenditures outlined in this notice exceed the $100 million yearly threshold for a major rule as defined in title 5, USC, section 804(2), and for a significant regulatory action as defined in E.O. 12866.

In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a rule may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 604 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a MSA and has fewer than 100 beds. We have determined that this notice with comment period will not have a significant economic impact on the operations of a substantial number of small rural hospitals.

The RFA requires agencies to analyze options for regulatory relief of small businesses. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and government agencies. Most hospitals and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $10 million or less annually. For purposes of the RFA, we consider most HHAs to be small entities. Individuals and States are not included in the definition of a small entity. This notice with comment period reflects the statutory update to the HH PPS rates published in the July 3, 2000 final rule as amended by the BIPA, but will have a significant positive effect upon small entities.

Section 202 of the Unfunded Mandates Reform Act of 1995 also requires that agencies assess anticipated costs and benefits before issuing any rule that may result in expenditure in any 1 year by State, local, or tribal governments, in the aggregate, or by the private sector, of $110 million. We believe this notice with comment period will not mandate expenditures in that amount.

Executive Order 13132 establishes certain requirements that an agency must meet when it publishes a notice with comment period that imposes substantial direct requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications. We have reviewed this notice under the threshold criteria of Executive Order 13132, Federalism. We have determined that this notice will not have substantial direct effects on the rights, roles, and responsibilities of States.

B. Anticipated Effects

In accordance with the requirements of section 1895(b)(3) of the Act, we publish an update for each subsequent fiscal year that will provide an update to the payment rates. Section 1895(b)(3) of the Act requires us, for FY 2003, to increase the prospective payment amounts by the home health market basket increase minus 1.1 percentage points. The home health market basket increase for FY 2003 is 3.2 percent. Taking into account the provisions of section 1895(b)(3) of the Act, the FY 2003 home health market basket increase of 3.2 percent is reduced by 1.1 percentage points yielding a 2.1 percent increase for FY 2003. For the sake of clarity, we have also included the amounts as increased by the rural add-on provision under section 508 of the BIPA.

Before we determine the impact of the update of the FY 2002 national 60-day episode rate by the applicable home health market basket increase, we need to review prior legislation affecting home health payment systems. Section 4602 of the BBA implemented IPS for FY 1998 through FY 1999, which was composed of both per-visit limits and a per-beneficiary limit. The per-visit limits were similar to the per-visit limits previously in place but reduced to 105 percent of the median (previous limits were set at 112 percent of the mean) and applied in the aggregate (that is, across disciplines, while the limits were specified for each of six disciplines). The per-beneficiary limit was a blend of an agency-specific rate and a national rate for agencies having a 1994 cost report and a national rate for those agencies not in existence in FY 1994. An agency was paid the lower of the following:

• Its actual costs.
• The costs from applying each of the per-discipline limits to the number of visits of that discipline, in the aggregate.
• The costs from applying the agency-specific limit to the number of beneficiaries served by that agency.

Section 4603 of BBA required that a PPS be implemented beginning with FY 2000. The implementation of PPS was, however, postponed until FY 2001 by section 5101(c) of OCESAA. BBA required that initial budget neutrality under HH PPS for FY 2000 be calculated for what expenditures would have been in FY 2000 if the IPS had continued to be in effect, but with both the per-visit and per-beneficiary limits in effect on September 30, 1999 (the last day of FY 1999) reduced by 15 percent. That is, we had to estimate what Medicare expenditures would have been if the IPS had continued for another year, but with the per-visit and per-beneficiary limits reduced by 15 percent. This further reduction of the per-visit and per-beneficiary limits was to ensure that home health spending was below the levels of the IPS.

BIPA did not delay the starting date for HH PPS. However, it did delay application of the 15-percent reduction in the IPS cost limits. The statute requires that HH PPS rates, beginning with FY 2003, be equal to the amounts that would have been effective for the IPS for FY 2001 with a 15-percent reduction in per-visit and per-beneficiary cost limits in effect on September 30, 2000, the last day of the IPS. The updates for FY 2003, as otherwise applied, would be added to the HH PPS reduced rates.

The key to the calculation is the estimation of what Medicare home health expenditures would have been in FY 2001. The determination of those expenditures requires, by statute, an estimation of those expenditures with the per-visit and per-beneficiary limits reduced by 15 percent. The estimate entails three key elements.

First, it requires an estimate of the distribution of agencies' costs relative to per-visit and per-beneficiary aggregate limits. For example, if all agencies' costs were at or above the per-visit or per-beneficiary limits, lowering the limits by 15 percent would have saved 15 percent. Similarly, if some agencies' costs were between 85 percent and 100 percent of either cost limit, lowering the cost limits by 15 percent would achieve less than 15 percent savings. Likewise, if some agencies' costs were below 85 percent of both cost limits, lowering the limits by 15 percent would not achieve savings (since agencies would be paid their actual costs).

Second, an estimation of home health expenditures for FY 2001 requires an estimate of the annual increase in the cost limits under IPS if the IPS cost limits were continued. Since IPS did not apply for FY 2001, the annual increase in cost limits that would have applied must be estimated. We also need to estimate how costs have increased relative to the cost limits. For example, the cost limits were increased by the market basket but agency costs would have most likely increased by some higher percentage.

Finally, under the statutory parameters, the estimate requires an assessment of the behavioral response of HHAs to a lowering of the per-visit and per-beneficiary limits that we estimate for FY 2001 home health expenditures. An assessment of behavioral response is particularly important given the patterns of Medicare home health spending and utilization that have fluctuated dramatically over the last 10 years. Dramatic increases in home health spending reflect very large increases in the number of visits per person served and increases in the number of persons receiving home health services. This is the behavioral response expected under a cost-based reimbursement system. Furthermore, HH PPS provides an incentive for agencies to provide fewer visits than before since they are paid a flat dollar amount to cover all services within a 60-day time period. Preliminary FY 2001 data show that the number of home health visits in the first year of HH PPS has decreased by a significant percentage compared to FY 2000, the last year of IPS. Meanwhile, reimbursement per visit is projected to increase substantially. This is the type of behavioral response that is consistent with the incentives of the new payment system.

Taking into account all these considerations and using the latest available reliable data, we have determined that at the time the BBA was passed, the 15-percent reduction in the limits would result in a 7-percent reduction in aggregate home health spending. We continue to believe that this is the best estimate of the level to which spending would have been reduced under the conditions prescribed by the BBA, namely extension of the IPS through FY 2001 (the first year of HH PPS) but with a 15-percent reduction in each of the IPS cost limits. Therefore, to achieve this level of home health spending, we will reduce the HH PPS payments by 7 percent.

At the time the BBA's enactment, the most recent settled cost report data for HHAs showed that most agencies' costs were at about the level of the existing cost limits. If the limits were lowered by 15 percent then, absent changes in the level of services provided, the resulting reduction in the HH PPS rates would be 15 percent. For example, if home health spending costs were $10 billion and all agencies were at the level of the limits, this level would also be $10 billion. If the level of the cost limits were lowered to $10 billion multiplied by (1 minus .15) it would be equal to $8.5 billion. Then savings to the Medicare program would be cost-limits divided by costs, for example, 1.5 billion divided by 10 billion or 15 percent.

CMS actuaries believed, based on past experience, that agencies would alter the nature and quantity of the services provided to achieve costs below the cost limits. Therefore, a full 15 percent reduction would not be required. The actuaries assumed that 50 percent of total HHA costs would be for agencies that reached the per beneficiary limits and 45 percent of total HHA costs would be for agencies that reached the per-visit limit. The actuaries further assumed that the remaining 5 percent of total HHA costs were under both limits before the 15 percent reduction. After the reduction, about 5 percent of their costs would now be over the limits. The actuaries assumed that 65 percent of the savings from the per beneficiary limit reduction would be lost and 50 percent of the savings from the per-visit limit reduction would be lost. For example, (.65 multiplied by .5) added to (.5 multiplied by .45) or 55 percent of the 15 percent reduction would be lost. This results in a net savings of (1-.55) multiplied by .15) added to (.05 multiplied by.05), or 7 percent. Thus, the actuaries estimate that HHAs faced with a potential 15 percent reduction would alter HHA behavior and would likely sustain a real reduction of only 7 percent. Because the real conditions under which behavior would change cannot be replicated, the actuaries continue to believe this model is the most appropriate expression of the statute's requirement for an estimate.

Both the applicable home health market basket increase of 2.1 percent for FY 2003 and the 7 percent reduction in aggregate home health PPS payments due to the required 15 percent reduction in the estimation of the IPS limits apply to all Medicare participating HHAs. We do not believe there is a differential impact due to the aggregate nature of the update.

We implemented the rural add-on amounts for FY 2002, effective on April 1, 2001 through the Program Memorandum, “Restoration of Full Home Health Market Basket Update for Home Health Services for Fiscal Year 2001 and Temporary 10 Percent Payment Increase for Home Health Services Furnished in a Rural Area for 24 Months Under the Home Health Prospective Payment System (HH PPS)” (Transmittal A-01-06, issued January 16, 2001) and the FY 2002 HH PPS Update Notice (66 FR 34687). Section 508 of the BIPA provides a 10 percent rural add-on for home health services furnished to beneficiaries whose site of service is a rural area (non-MSA) for 24 months beginning with episodes ending on or after April 1, 2001 and before April 1, 2003. The 10 percent rural add on applies to episodes ending before April 1, 2003 and, therefore, will end mid FY 2003, as required by the statute.

1. Effects on the Medicare Program

This notice with comment period merely provides a percentage update to all Medicare HHAs. Therefore, we have not furnished any impact tables. We increase the payment to each Medicare HHA equally by the home health market basket update for FY 2003, as required by statute. There is no differential impact among provider types. The impact is in the aggregate. We estimate that there will be an additional $320 million in FY 2003 expenditures attributable to the applicable FY 2003 market basket increase of 2.1 percent. As stated above, expenditures outlined in this notice exceed the $100 million yearly threshold for a major rule, as defined in Title 5, U.S.C., section 804(2) and for a significant regulatory action, as defined in E.O. 12866.

As discussed previously, section 501 of BIPA impacts the estimated Medicare home health expenditures in FY 2003. Section 1864(b)(3)(A)(i)(III) of the Act, as redesignated by section 501 of the BIPA, requires for FY 2003 the estimation of what would have been paid under the IPS with the IPS cost limits reduced by 15 percent, if the IPS had been updated to FY 2003. At that time of the BBA, lowering the limits by 15 percent would have resulted in a reduction of 15 percent from Medicare home health spending, without any behavioral offset. However, as explained previously, we anticipate that due to the behavioral responses, the level by which actual payments would be reduced by lowering the IPS cost limits would not be the same as the percent by which the cost limits themselves would be lowered. The full impact of Medicare savings attributable to the 15 percent reduction in the IPS limits is lower due to the behavioral responses of the industry. The total savings reflecting the behavioral responses is divided by the estimates for spending, which yields the percent at which aggregate home health spending is lowered. That is, implementation of the 15 percent reduction in IPS cost limits would lead to a 7 percent reduction in aggregate home health spending and, therefore, equivalently a 7 percent reduction in home health payments. The statute requires us to look at the 15 percent reduction to the IPS limits updated to FY 2003. We believe the HHAs would have altered their behavior to avoid the cost limits and maintain that our assumptions surrounding the 7 percent reduction in overall payments is correct. Based on the latest available data, our best estimate is that a 15 percent reduction in cost limits would result in a 7 percent reduction in aggregate home health spending and, therefore yield a 7 percent increase in home health payments. Both the home health market basket increase of 2.1 percent for FY 2003 and the 7 percent reduction in aggregate home health PPS payments due to the application of the required 15 percent reduction in estimated IPS cost limits apply to all Medicare participating HHAs. We do not believe there is a differential impact because of the aggregate nature of the update.

As discussed above, we implemented a rural add-on of a 10-percent payment increase to the episode and per-visit payment amounts under the HH PPS for Medicare home health services furnished in a rural area for a 24-month period. The 10-percent rural add-on increases estimated Medicare home health expenditures by $220 million in FY 2003.

(Source: President's FY 2003 Budget)

We provide impact tables below that display projected Medicare home health spending, which includes the 15 percent reduction in the IPS cost limits, as required by statute, that translate into a 7 percent reduction in HH PPS rates in FY 2003. Under the President's FY 2003 Budget, which assumes no further delays in the reduction, Medicare's total home health spending is projected to increase 12.2 percent in FY 2003, 8.3 percent in FY 2004, and 7.4 percent in FY 2005.

The President's Budget for FY 2003 projects a 12.2 percent increase in home health spending in FY 2003. Approximately 6.8 percent of this increase is because payments for services rendered in FY 2002 will not be actually paid until FY 2003, hence a “cash lag” occurs. Per episode payments incurred in FY 2002 but not paid until FY 2003 will be at higher levels than payments for the same services both provided and paid in FY 2003 because per-episode rates will be reduced in FY 2003 to reflect the payment reduction required by BIPA. The remaining 5.4 percent is accounted for by additional assumptions concerning projected increases in utilization and case mix, a 2.1 percent inflation increase, and the 10 percent rural add-on required by BIPA. These factors interact with the rate reduction required by BIPA to produce the 5.4 percent increase in overall spending.

(Source: President's FY 2003 Budget)

2. Effects on Providers

This notice implements statutorily required adjustments to Medicare HH PPS rates for providers of Medicare home health services. We do not anticipate specific effects on other providers. This notice with comment period reflects the statutorily required annual update to the Medicare HH PPS rates published in the July 3, 2000 final rule and applies to the Medicare HHAs. We do not believe there is a differential impact because of the consistent and aggregate nature of the update.

C. Alternatives Considered

As discussed in section II, this notice with comment period reflects an annual update to the HH PPS rates as required by statute. Due to the lack of discretion provided in the statutory requirements governing this notice with comment period, we believe the statute provides no latitude for alternatives other than the approach set forth in this notice reflecting the FY 2003 annual update to the HH PPS rates. Also, as discussed in section II, for clarification this notice addresses the 10 percent rural add-on required under section 508 of the BIPA for home health services furnished to beneficiaries who reside in a rural non-MSA area. Other than the positive effect of the market basket increase, this notice with comment period will not have a significant economic impact nor will it impose an additional burden on small entities. When a regulation or notice imposes additional burden on small entities, we are required under the RFA to examine alternatives for reducing burden. Since this notice with comment period will not impose an additional burden, we have not examined alternatives.

D. Conclusion

We have examined the economic impact of this notice with comment period on small entities and have determined that the economic impact is positive, significant, and that all HHAs will be affected. To the extent that small rural hospitals are affiliated with HHAs, the impact on these facilities will also be positive. Finally, we have determined that the economic effects described above are largely the result of BIPA provisions that this notice addresses. We continue to analyze the appropriateness and accuracy of payments for differing case mixes.

In accordance with the provisions of Executive Order 12866, this notice with comment period was reviewed by the Office of Management and Budget.

(Catalog of Federal Domestic Assistance Program No. 93.773, Medicare—Hospital Insurance; and Program No. 93.774, Medicare—Supplementary Medical Insurance Program)